Kawasaki City, which provided nearly half of the festival’s budget, reportedly expressed concerns about the lawsuit in its conversations with organisers.
Local officials however denied pressuring organisers to drop the film, with one telling AFP they merely questioned “whether showing such a film is appropriate.”
The film’s distributor said the decision was shocking and called the organiser’s explanations “insincere and irrational.”
“If this decision stands, it would create a bad precedent for a film festival created by citizens to succumb to pressure from authorities,” distributor Tofoo’s president Shigeki Kinoshita told AFP.
A second film firm said it would withdraw two of its films from the festival in protest, criticising organisers for “murdering freedom of expression.”
An exhibition in central Japan was in August shut down for two months after it received threats for displaying a South Korean statue of a wartime sex slave.
The central government pulled funding for the exhibition, which eventually reopened for the final few days of its run.
Bilateral relations between Japan and South Korea have frayed in recent month over a long-running dispute on the use of forced labour during World War II, with the two sides trading retaliatory measures.